When Platforms Become Participants: The Structural Risk Behind Polymarket’s In-House Market Making Strategy

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By CoinEpigraph Editorial Desk | December 8, 2025

Prediction markets were designed to be radically neutral.
A marketplace for collective intelligence.
A venue where incentives — not institutions — determine accuracy.

That is the ideal.

But an emerging report suggests that Polymarket, the most globally visible prediction platform, is preparing to introduce an in-house market maker — a liquidity entity operated by the platform itself. If true, it represents not a minor product adjustment but a structural shift: a marketplace stepping into the arena as one of its own participants.

The implications ripple far beyond Polymarket.
They touch the foundations of how markets signal truth, how liquidity is manufactured, and how regulatory perimeters respond when the house begins taking the other side of the trade.

This is not a scandal story.
It is a systems story — and it may define the future of prediction markets.

The Liquidity Problem Prediction Markets Cannot Escape

The classical challenge facing all prediction markets is simple:

• outcomes are binary
• liquidity is shallow
• informational asymmetry is high
• spreads widen rapidly under volatility

Even the most active markets can behave like thinly traded small-caps under stress.

Market makers help — but external MMs face obstacles:

• uncertain regulatory status
• inconsistent ROI
• unpredictable event newsflow
• information disadvantage versus platform data models

The economic truth:
It is hard for an external liquidity provider to profitably operate in a marketplace designed to reveal information, not preserve spreads.

So the platform itself becomes the prime candidate to supply liquidity.

Not out of desire.
Out of structural necessity.

When the House Trades: The Alignment Dilemma Emerges

If Polymarket (or any prediction platform) becomes its own market maker, it crosses a long-standing boundary in market design. The platform transitions from:

• venue →
• participant
• facilitator →
• actor
• arbiter →
• competitor

This creates what can be called the Alignment Dilemma — the tension between the platform’s duty to maintain a fair market and its incentive to optimize internal inventory, manage spreads, or dampen volatility.

Even if intentions are clean, the structural risks include:

1. Latent Information Advantage

The platform has superior visibility into:

• user flows
• liquidity imbalances
• trade timing
• odds movement velocity

That is not insider trading in a classical sense — but it is asymmetric access to behavioral signals.

2. Spread Shaping

An internal MM can tighten spreads (good) or widen them under volatility (bad).
Its behavior influences price discovery.

3. Perceived Adversarial Positioning

Even in the most neutral implementation, users may believe the house is positioning against them.

Belief is a form of risk.
Belief affects participation.
Belief shapes liquidity.

Prediction markets run on trust more than capital.

The Structural Case For In-House Liquidity

To be fair, an internal market maker may be the only viable path to:

• deeper markets
• narrower spreads
• higher volume
• reduced slippage
• faster odds convergence
• a more stable platform during news shocks

External MMs have shown inconsistent commitment.
Users routinely complain about orderbook gaps.
And thin liquidity undermines the promise of prediction markets as “the world’s probabilistic dashboard.”

A platform-supplied MM could stabilize the system the same way:

• designated market makers stabilize equities
• internalizers stabilize retail order flow
• liquidity providers stabilize decentralized AMMs

If executed correctly, it could strengthen the entire sector.

The issue is not capability.
The issue is design and governance.

Regulatory Implications: The CFTC Will Not Ignore This

If Polymarket — already operating in a gray zone — runs an internal liquidity engine, three regulatory questions arise:

1. Is the platform effectively “operating a derivatives market”?

If yes, CFTC jurisdiction strengthens.

2. Does a platform-supplied MM constitute “internalization of customer order flow”?

This resembles practices regulated heavily in equities.

3. Does the MM’s activity influence event outcomes?

Regulators are highly sensitive to markets that can appear self-referential or subject to manufactured odds.

Prediction markets are already under scrutiny for:

• election markets
• geopolitical forecasting
• AI-run trading models
• real-world impact on incentives

An in-house MM adds heat to the perimeter.

The Invisible Architecture: When Platforms Become Sovereign

What matters most is this:

Prediction markets are not simply financial tools.
They are governance architectures, where participants outsource probabilistic judgment to the collective. When the platform becomes a liquidity actor, it introduces sovereignty drift — a shift where the venue gains influence over the very signals it is designed to report.

This is identical to:

• exchanges that internalize equity flows
• bookmakers adjusting line odds
• decentralized protocols where foundation multisigs shape liquidity

It is not inherently wrong.
But it is inherently structural.

And structure determines behavior.

The Next Phase: Market Design Will Decide Everything

If Polymarket proceeds with an in-house market maker, the sector will face a simple test:

Does platform-supplied liquidity:

A. Improve accuracy and participation?
— or —
B. Introduce subtle distortions that erode trust?

Everything depends on:

• transparency standards
• separation-of-duties architecture
• auditability of internal MM behavior
• how spreads are shaped
• whether users perceive neutrality

Prediction markets operate on a razor-thin psychological edge:

users must believe they are competing against the news itself — not against the house.

If Polymarket can satisfy that requirement, the platform may evolve into a global probabilistic exchange engine.

If it cannot, the market will price in house friction — and liquidity will migrate accordingly.

The Signal Behind the Story

At a structural level, this development reveals something larger:

Platforms are no longer just marketplaces.

They are becoming active participants in the financial systems they create.**

This shift is happening across:

• centralized exchanges
• DeFi protocols
• AI-trading venues
• sports betting platforms
• OTC liquidity engines

Polymarket is simply the latest illustration of a deeper trend:
the architectures of the new economy increasingly govern — and compete — simultaneously.

How that duality is managed will determine which platforms survive, which fail, and which become financial sovereigns.

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